Class Warfare in the Housing/Gold Ratio

Updating the big-picture charts of US housing priced in gold ounces...

HARD TO SAY what all the tax-payer cash thrown at US housing will do
to home prices. Because at first glance, the $14 billion of aid (aka meddling) apportioned
on Friday seems set to both inflate and depress prices.

Subsidizing over-priced contracts stops the market from clearing, and people
whose homes are worth less than their mortgage can now seek government-backed
loans to cover the difference. But that's only thanks to lenders writing down
what they're owed - or rather, what the securitized bonds holding their debtors'
mortgages are due at maturity - thus resetting the existing loan's value closer
to current reality.

How close to reality, however, is another question.

One mortgage-bond investor, speaking to The Economist magazine, calls
it "class
warfare". Forced by the White House to forgive debtors a chunk of their
debts, you can see the bondholder's point.

Still, at least the loans were priced only in Dollars. Valued in gold,
today's loan modification or delinquency - let alone default - would be even
harder to bear, as the chart of all US house prices above shows.

Twice peaking at pretty much 500 ounces of gold on the Case-Shiller data twice
in the last forty years, the chart measures the average US home price, divided
by the annual average ounce price of gold. Whether or not the low of 100 ounces
gets hit again remains to be seen. But the steep plunge has flattened for now
- and the way mortgage modification is running, the bottom in house prices
could take a while to reach yet.

New units, for which BullionVault can
crunch monthly data courtesy of the Census Bureau, certainly don't seem to
have hit their gold price floor
just yet.

Delaying the happy day of market-clearing prices still further is the second
part of this week's new Obama housing rescue injection.

Bank of America jumped early on Wednesday, rather than waiting to be pushed
by the White House. It voluntarily laid out a plan for debt jubilees worth
up to 30% of initial loans. Which would kind of accept the 30% drop in national
prices since 2006.

But trouble is, BoA wants to spread that write-down - taking loan values to
current levels, remember, and only in a tiny handful of cases no doubt - across
the next five years.

The bubble remains punctured, in short, and this sticking plaster can only
slowed the rate of deflation. Sixty months is a long time for mortgage modification
to catch up with today's prices. Not that it could ever work anyway - if "work" means
stop the destruction of value, rather than letting the market fall as it wants
to.

"It's pointless to rewrite these loans because they're underwater," said one
economist, Sam Khater at First American CoreLogic in Virginia, to Bloomberg
on Thursday.

"[Modifications] clearly aren't working...It's not a surprise."

New data from the Office of the Comptroller of the Currency says that over
57% of once-delinquent loans modified before end-2008 were delinquent again
by end-2009. Overall in the US mortgage market, some 14% of home loans are
a month or more behind with their payments. Some 1-in-4 loans are worth more
than the home they're held against, too.

Deflation rolls on. Throwing money at it only destroys more money again.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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